WATCO,BHUBANESWAR vs. CIT(EXEMPTIONS), HYDERABAD

The order passed by the learned CIT(Exemption), Hyderabad is capricious, invalid, illegal and bad in law.

The learned Commissioner (Exemption) erred in rejecting our application for registration u/s 12AA of Income Tax Act on the ground that the appellant was carrying on activities in the nature of commerce & the object of the appellant were not to be treated as for Charitable purpose u/s 2(15) of Income Tax Act, 1961. 3. The appellant craves leaves to amend, modify, oblige, add to or resigned any or all of the above ground.

Brief facts of the case are that the assessee, a wholly owned not- for-profit company set up by Government of Odisha vide notification No. 17402-HUD-13-REFM-65-SCH-17-0065/2014/HUD dated 09.07.2015 in the name of Water Corporation of Odisha Limited (In short „WATCO‟). WATCO was incorporated on 24.11.2015 to oversee the ring-fenced operation of water supply production & distribution system, operation & maintenance of sewage collection, treatment and operation & maintenance of sewerage network, sewage treatment & disposal. Notification No. 17402-HUD-13-REFM-65-SCH-17-0065/2014/HUD dated 09.07.2015 is extracted as under:-

The initial authorized and paid-up capital of the Company shall be Rs. 100 Lakh divided into 1,00.000 equity shares of Rs. 100 each.

The Registered Office of the Company will be in Bhubaneswar, Odisha.

The main objectives of the Company will be – (i) To take over from the PHEO, the functions in regard to Operation & Maintenance of water supply and sewerage services at present being handled by it together with assets and liabilities pertaining to such activities; (ii) To carry on the function of Operation & Maintenance of production, distribution and management of water supply and sewerage services including sewage treatment disposal. (Hi) To render all necessary services in regard to Operation & Maintenance of water supply and sewerage to consumers and on request to private institutions or individuals also. (iv) To take up Operation & Maintenance of water supply and sewerage facilities to be developed in the existing and developing new regions in future. (v) To assess the adequacy of water supply & sewerage services & Infrastructure. (vi) To prepare Plan & Schemes for & Implement creation of capital assets in water supply system & to prepare plans and schemes for Operation & Maintenance and supply of drinking water to the required national standards; (vii) To prepare Plan & Scheme for creation of capital assets in sewerage network & treatment and to prepare plans and schemes for Operation & Maintenance of Sewerage, Sewage treatment and disposal of sewage to the required national standards; (viii) To collect water and sewerage service charges on behalf of the urban local body; (ix) To review and establish revision of the tariff, and charges of water supply and sewerage systems from time to time and implement in the areas of Urban Local Bodies; (x) To review annually the technical financial, economic and other aspects of water supply and sewerage system of every scheme; (xi) To outsource part of its activities to achieve higher efficiencies and outcomes in the achievement of its business goals.

The following persons/entities shall be promoters of the company and subscribers to the Memorandum and Articles of Association of the Company:— Sl.No. Name of Subscriber No. of Equity shares to be taken (i) Governor of Odisha represented by 51,000 Secretary, Housing & Urban Development Department, Government of Odisha. (ii) Bhubaneswar Municipal Corporation 26,000

The WATCO Ltd. shall initially take over the functions of PHEO in line with the objectives above for the Bhubaneswar Municipal Corporation, Khurda and Jatni Municipalities area and any other Urban Local Body so assigned through Gazette Notification in Housings Urban Development Department from time to time. By Order of the Governor G. MATHI VATHANAN Commissioner-o/m-Secretary to Government

Subsequently, on 16.08.2017, the assessee has filed an application in Form 10A for seeking registration u/s 12A of the Income Tax Act, 1961 („the Act‟ in short) on 30.06.2019. The said application was rejected by Commissioner of Income Tax (Exemption), Hyderabad with certain observations, vide order u/s 12A dated 06.12.2019. 4. Aggrieved by the said order of CIT(E) the assessee is in appeal before us.

At the outset, the Ld AR of the assessee had explained the facts of the case. The main facts and submissions of the Ld AR, relevant for adjudicating the issue, are as under:-

It is submitted that revised objective of the WATCO were approved by Board of directors of the company and also by shareholders in AGM dated 28.11.2018. These amended objectives along with other necessary documents were submitted to the Ld CIT(E) on 22.11.2019 in his camp at Bhubaneswar.

CIT(E) has refused to grant registration u/s 12AA with his observations in the order. Extracted as under:-

Rejection of earlier application filed on 22.02.2017: The assessee has earlier filed application in Form 10A seeking registration u/s. 12A of the Act on 22.02.2017 and the said application has been rejected vide order dated 16.08.2017. 6 The relevant portion of the order is reproduced below for ready reference:

On going through the Aims & Objectives of the Society, it is noticed that some of the objects speaks as under: "(vi) Creation of capital assets in water supply system. (vii) Creation of capital assets in sewerage. (viii) To collect water and sewerage service charges on behalf of the Urban Local body, (ix) To review and establish revision of water and sewerage service charges from time to time. (xi) To outsource parts of its activities in the achievement of its business goals".

1 During the present proceedings, the assessee has submitted that they have carried the amendments to the MoA and filed a copy of Resolution- dated 28.11.2018, wherein certain amendments were carried out to the objects. However, the said Resolution has not been registered before the RoC. Hence, the objects as appearing in the original MoA are valid as on date. Further, the application of the assessee has been rejected based on such objects. Hence, there is no change in the facts of the case. Therefore, the application of the assessee filed in Form 10A for registration u/s. 12A of the Act is rejected.

On observation of the Ld CIT(E) in his order that ―Copy of Resolution dated 28.11.2018 wherein certain amendments were carried out to the objects. However, the said Resolution has not been registered before ROC. Hence, the objects as appearing in the original MOA are valid as on date.‖ Ld AR submitted that such an bald observation made by the Ld CIT(E) was without providing an opportunity of being heard to the assessee or to rebut with supporting documents.

It is further submitted by the Ld AR that, Ld CIT(E) has not appreciated the facts of the case correctly and held that the object of the appellant are in the nature of business/commerce and thus not falls

Before arguing for the main grounds of this appeal, it was the prayer of the Ld AR to admit an additional ground as per Rule 11 of the Income Tax (Appellate Tribunal) rules 1963. The permission was granted. Additional ground pressed by the assessee was as under:- ―On the facts and in the circumstances of the case, the appellant may kindly be held as a ―State‖ making it not liable to pay income tax under the Income Tax Act, 1961 as per the provisions of Article 12 read with Article 289 of The Constitution of India.‖

Written submission in support of the additional ground submitted in paper book was as under:-

The share holding pattern of the appellant is as follow and therefore it fulfils the 1st test as per the aforesaid Hon'ble Apex Court order: Name No of shares to be subscribed

Members of the Board of WATCO are as follows and as the majority of Board of Directors are government employees, the 2nd test regarding deep and pervasive State control is also fulfilled. ACS/Pr. Secretary/Commissioner-cum- Chairperson Secretary, Housing & Urban Development Department. Commissioner, Bhubaneswar Municipal Director Corporation Vice Chairperson, Bhubaneswar Development Director Authority Representative of Finance Department Director Engineer-in-Chief/Chief Engineer, Public Health Director Engineering Organisation

WATCO, as empowered by Govt, of Odisha, is the sole governmental agency engaged in supply of water in its area of operation and therefore the 3rd test i.e. "monopoly status which is the State conferred or State protected" is also fulfilled.

WATCO is engaged in water supply and sewerage work and therefore the 4th test i.e. "functions of the corporation are of public importance and closely related to governmental functions" is also fulfilled.

As per NOTIFICATION No.l7402-HUD-13-REFM-65-SCH-17- 0065/2014/HUD dated 09.07.2015 [Refer Page-23 of original paper book dated 27.05.2022] the main objectives of the Company i.e. WATCO is to take over from the Public Health Engineering Organization (PHEO), the functions in regard to Operation & Maintenance of water supply and sewerage services at present being handled by it together with assets and liabilities pertaining to such activities.

Thus, the 5th test regarding transfer of a department of Government to a corporation is also fulfilled in the present case.

It is therefore submitted before this Hon'ble Bench that the Appellant may kindly be declared as a state making it not liable to pay income-tax under the Income tax Act, 1961 as per the provisions of Article 12 read with Article 289 of The Constitution of India.

On the contrary, Ld DR has supported the orders of the Ld CIT(E) and submitted that the rejection order was justified, as the assessee was failed before the Ld CIT(E) to substantiate that the resolution passed for amended in objectives of the assessee company were registered with the ROC and hence the same could not be considered as valid. It is also submitted that the original objects of the company were not in the nature of charity and thus registration u/s 12AA of the Act cannot be granted. Thus, the Ld CIT(E)‟s order was justified and should be upheld. No arguments regarding additional ground were advanced.

We have considered the rival submissions, perused the material available on records and the judgments cited before us in order to prove the contentions by the Ld AR.

On perusal of the submission of the Ld AR with respect to additional ground taken the assessee shall be held as “State” and thus no tax can be levied on it under the income tax act. To examine on the 12 facts that whether the claim of the assessee that it holds the status of “State” is correct or not, definition of the “State” under Article 12 of the Constitution of India, is drawn out as under: Article 12 states : “In this Part, unless the context otherwise requires, ―the state‖ includes the Government and Parliament of India and the Government and the Legislature of each of the States and all local or other authorities within the territory of India or under the control of the Government of India.“

As per the above definition of “State”, if we check under which head the assessee company would fall, the probable answer is “Local or Other Authorities”. But, the definition of “Local or Other Authority” was not defined in the constitution or any other statute, however, a fundamental guidance was accorded by the Hon‟ble Apex Court in the case of Som Prakash Rekhi vs Union Of India (supra), wherein the Hon‟ble Apex Court has prescribed certain tests to determine as to whether an institution is „State‟ within the meaning of Article 12 of the Constitution of India or not. The conditions to claim eligibility of being a “State” as described in the said order by the Hon‟ble Apex Court, reads as under:- "Let us cull out from Airport Authority (supra) the indicia of "other authorities.........under the control of the Government of India" bringing a corporation within the definition of "the State". The following factors have been emphasised in that ruling as telling, though not clinching. These characteristics convert a statutory corporation, a government company, a cooperative society and other registered society or body into a State and they are not confined to statutory corporations alone. We may decoct the tests for ready reference:

We have carefully perused the submissions of the assessee (supra) regarding fulfillment of the aforesaid tests/conditions carved out by the Apex court and found that the assessee company has satisfied the said tests, thus, we hold that the assessee company falls under the definition of “State” within the meaning of Article 12 of the Constitution of India and, therefore, in our considered opinion entitle for immunity from the taxation under the provisions of Income Tax Act 1961 as directed under article 289 of constitution of India 1949, which read as under:- Article 289 in The Constitution Of India 1949

Exemption of property and income of a State from Union taxation (1) The property and income of a State shall be exempt from Union taxation (2) Nothing in clause (1) shall prevent the Union from imposing, or authorising the imposition of, any tax to such extent, if any, as Parliament may by law provide in respect of a trade or business of any kind carried on by, or on behalf of, the Government of a State, or any operations connected therewith, or any property used or occupied for the purposes

After thoughtful analysis of the facts, in the backdrop of aforesaid observations, mandates from the Article 12 & 289 of the Constitution of India and respectfully following the principle of law laid down by Hon‟ble Apex Court followed by coordinate benches of the ITAT, referred to supra, we are of the view that the WATCO, the assessee company hold the status of “State” within the meaning of Article 12 of the Constitution of India and entitle for immunity from taxation under the provisions of Income Tax Act 1961 as declared by Article 289 of the Constitution of India 1949. Consequently, the additional ground of the assessee stands allowed.

Since the additional legal ground of the assessee is allowed culminating that the income of the assessee is not taxable in terms of our aforesaid observations, the original ground Nos. 1, 2 & 3 of the appeal are became academic and thus needs no separate adjudication.

In the result appeal of the assessee allowed. Order dictated and pronounced in the open court on 27/09/2022. (जाजज माथन) (अरुण खोड़पऩया) (GEORGE MATHAN) (ARUN KHODPIA) न्यानयक सदस्य / JUDICIAL MEMBER ऱेखा सदस्य/ ACCOUNTANT MEMBER कटक Cuttack; ददनाांक Dated 27/09/2022 Prakash Kumar Mishra, Sr.P.S.

CIT(Exemption), Hyderabad आयकर आयुक्त(अऩीऱ) / The CIT(A), 3. आयकर आयुक्त / CIT 4. पिभागीय प्रयतयनधध, आयकर अऩीऱीय अधधकरण, कटक / DR,

ITAT, Cuttack आदेशािुसार/ BY ORDER, गार्ज पाईऱ / Guard file. 6. सत्यापऩत प्रयत //// (